Retirement Blog

End payroll tax holiday

It's a foregone conclusion that most people want to keep more of their earnings in their pocket by paying less in taxes. But some people are questioning the wisdom of extending the payroll tax cut adopted last year.

Our leader, however, is adamant about extending them.

"This is about making sure that everybody is doing their fair share and that the middle class does not see their taxes go up by $1,000 in 23 days," President Barack Obama said in a statement issued yesterday.

When the president refers to taxes going up by $1,000, he's alluding to the taxes that would be paid throughout 2012 by someone earning $50,000.

The payroll tax rate is normally 6.2 percent for individuals plus another 6.2 percent matched by employers for a total of 12.4 percent. The FICA tax is used to pay for Social Security. Last year, it was cut by 2 percentage points to 4.2 percent for workers.

Dissenters are getting louder

But not everyone thinks it's a great idea to extend those tax cuts. In a piece aired by NPR earlier this week, Charles Blahous, one of the six trustees of Social Security and Medicare, said the payroll tax break may be hurting Social Security's long-term solvency problem.

"This could be the beginning of the end of the idea that this is an earned benefit (and) where benefits enjoy a certain amount of political protection because of a notion that they have been paid for in the past by the beneficiaries," he said on NPR's Morning Edition.

The tax cut reduces funds flowing into Social Security, but the Treasury Department has been making up for the shortfall by deducting money from general revenues and would continue to do so while these cuts remain in effect. In other words, they're moving money that we don't have from one place on the ledger to another, in a cook-the-books maneuver. Thank foreign investors, especially the Chinese, for the tax break.

But next year is an election year. Politicians perceive Americans as needing this tax break, even though its impact on the economy is questionable. So they're devising all kinds of ways to extend it and even enhance it. Republicans want to keep the rate at 4.2 percent, paying for it by freezing salaries and cutting back on the federal work force. Democrats want to reduce the current break further, making it 3.1 percent, and pay for it by "asking the Nation's wealthiest to contribute a small percentage more," according to another statement issued by the administration yesterday.

The Senate rejected both ideas yesterday, so next week it goes to the House. President Obama has made his intentions clear, saying he is willing to spend Christmas in Washington, D.C., and postpone his planned vacation to Hawaii until the deal is done.

The right thing to do

In his now-famous Kansas speech earlier this week, President Obama said extending the cuts "will help families pay their bills, it will spur spending, it will spur hiring, and it's the right thing to do."

I asked my friend and colleague, Kay Bell, who writes Bankrate's Tax blog as well as most of this site's tax stories, if it's the right thing to do.

"If you need extra dollars to make ends meet, you'll say yes. If you're looking for Social Security benefits down the road, you'll say no," she says. "This answer, like all prompted by political and tax debates, depends on your point of view." As for her view, Kay says she's getting close to retirement and wants Social Security to be there for her.

I feel the same way. Let's not further jeopardize the Social Security program and this nation's finances. In my opinion, our leaders in Washington ought to let the payroll tax cut lapse.

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6 Comments

Deadpool

December 10, 2011 at 10:45 am

I think it'd be better for the economy if the government stop being so involved.

Pretty soon their next solution will be to just send anyone over the age of 60 to South America.

There, problem solved with Social Security.

Paul

December 10, 2011 at 10:09 am

I say we keep the Payroll Tax Holiday in place and end the Bush era tax breaks for the rich. Who do you think needs the money more, the people with more money or the people with less?

EIEIO

December 10, 2011 at 8:51 am

Republicans are willing to go along with the extension of FICA/PAYROLL tax holiday if the Keystone Pipeline can be built. This produces jobs,and more jobs create more taxpayers. DC must cut spending just as we do in our private lives.

Pondering thoughts: How come it is DOESN'T hurt current and very near SS recipients with the reduction of FICA now, but then we are told that if younger and entry workers are allowed to opt(chose) out of SS and save the same amount or current reduction in their own accounts it DOES hurt current and near retirees? Huh! This does not compute to me.

JeffinNC

December 10, 2011 at 7:24 am

Barbara: thank you so much for getting this point of view out there. I do not like the idea of cutting the payroll tax at all - it's going to be hard enough for the country to meet the obligations of the retiring Baby Boomers as it is!

This break was introduced as a "temporary measure" to spur the economy. But if we've learned anything by watching Washington, there are no temporary measures. Once tax breaks like this get started (like any other federal initiative or subsidy) they tend to hang around a lot longer than originally intended.

haha

December 10, 2011 at 1:17 am

I think a PERMANENT INCOME TAX CUT would be better for the economy and the deficet instead of a yearly "tax holiday" on FICA that harbors uncertainty because of the constant political wrangling of getting it renewed or not. Plus, like stated above, it's robbing from a Social Security system that's already in trouble!

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